LITIGATION SESSION FORUM SESSION 3:

CLAIMS AGAINST INDUSTRY PARTNERS AND OTHER PLAYERS

presented at MBAs REGULATORY COMPLIANCE CONFERENCE 2011 September 25, 2011 Washington DC

Tim P. Law Partner Reed Smith, LLP 2500 One Liberty Place 1650 Market Street Philadelphia, PA 19103 (215) 241-1210 jellison@reedsmith.com

Sunny S. Huo Member Severson & Werson One Embarcadero Center Suite 2600 San Francisco, CA 94111 (415) 398-3344 ssh@severson.com

PRESENTATION OVERVIEW
Mortgage Insurance Title Insurance Buyback Disputes Discussion

WHAT IS MORTGAGE INSURANCE?

Type of insurance policy which helps reduce or eliminate a loss due to a borrowers default on a mortgage loan Enables borrowers to purchase homes with less than the traditional 20% down payment by sharing the mortgage risk with the mortgage lender There are several mortgage insurers (MIs) in the market today, including United Guaranty, Radian, PMI, Genworth Financial, MGIC, RMIC, and Triad.

EFFECT OF MORTGAGE CRISIS ON MORTGAGE INSURANCE

In mid-2007, the mortgage market experienced an unprecedented decline MIs, like most businesses, have been feeling the effects of deterioration of mortgage market

According to a recent Moodys report, MIs are

increasingly implementing the same claim mitigation strategy to reduce losses in this economy: rescind and deny claims

These rescissions and denials are primarily based on

alleged misrepresentations in loan application
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THE CLAIMS PROCESS

Policyholders must comply with the claims process detailed in its MI Policy to obtain coverage Policyholders have an obligation to complete procedures within designated time periods Failure to fulfill these requirements may result in reduction of claim amount or forfeiture of coverage The claims process includes providing notice, producing monthly reports and filing a claim

Notice of Default Provisions

Policyholders must provide written notice to MIs within set period of time when borrower is in default or proceedings have commenced against borrower
Some notice of default provisions require notice in as little as 10 days MIs typically raise issues with timeliness of policyholders notice Policyholders should install systems to track period of time in which it must provide notice
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Monthly Reports Provisions

Reports required by MIs, advising on the status of loan

and servicing efforts undertaken to remedy the default.

Must contain all information and documentation requested by MI. Must continue until borrower no longer in default.

Some MIs require reports on specific forms.

Failure to comply with this provision could reduce a claim amount or result in MI withholding coverage.

DISPUTE RESOLUTION PROVISIONS

Most mortgage insurance policies contain certain resolution provisions in the event of a dispute between the policyholder and MI.
Policyholders should understand the breadth and scope of

its mortgage insurance policies dispute resolution provisions.

Such provisions could drastically affect whether the policyholder is able to resolve disputes in its favor. Here, we examine suit limitations, choice-of-law and arbitration provisions.
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Suit Limitation Provisions

Clause typically used by insurance companies to shorten the statue of limitations for breach of contract claims
Such provisions should be treated very seriously, even though there are numerous defenses to such provisions MIs often rely on such provisions to deny coverage Policyholders should look to negotiate suit limitation periods, if possible, with special emphasis on when the clock begins to run

Choice-of-Law Provisions
Some mortgage insurance policies specify which states laws apply to any dispute concerning the interpretation of the policy The law that applies to a mortgage insurance policy can significantly affect a dispute over policy construction and

application
Standards for rescission can be very different across states Policyholders should take the applicable law into

consideration when purchasing coverage

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Arbitration Provisions
Certain Policies set forth the circumstances and procedures under which claims may be arbitrated Some flexible provisions allow a policyholder at its option to elect arbitration In Republic Mortgage Ins. Co., et al. v. Countrywide Financial Corp., et al., No. 603915 (N.Y. Sup. Ct. filed Dec. 31, 2009), the court granted policyholders motion to compel arbitration and dismissed complaint, finding arbitration clause did not require policyholder to demand arbitration before litigation was brought by MI Some provisions require arbitration but permit declaratory judgment actions on matters of policy interpretation Disputes may arise over which rules apply and how the arbitration should proceed:

Disputes may also arise over choice of law and location of the hearing of the arbitration
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REPRESENTATION PROVISIONS & EXCLUSIONS

Some representation provisions impute borrower misrepresentations to the policyholder

Some provisions limit the MIs ability to rescind or deny coverage if, for example:

Borrower made 12 scheduled payments; or Purported fraud was not committed by a first party (i.e., insured, agent of insured, or loan originator)
Some Policies may exclude coverage for any claim involving or arising out of any dishonest, fraudulent, criminal or knowingly wrongful act by the insured

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RECENT PRO-POLICYHOLDER DECISIONS

In United Guaranty Mortgage Indemnity Co. v. Countrywide Financial Corp., Case No. CV-09-1888-MRP(JWJx) (C.D. Cal. filed Oct. 5, 2009), the court held that MIs cannot globally rescind policies based on alleged misrepresentations in some, but not all, loan applications. In Radian Insurance Inc. v. Deutsche Bank National Trust Co., C.A. No. 08-2993 (E.D. Pa. filed Oct. 1, 2009), the court held that the economic loss rule bars MIs from bringing negligence or negligent misrepresentation claims against lenders based on alleged misrepresentations. In United Guaranty Residential Ins. Co. of North Carolina v. Countrywide Financial Corp., et al., No. 1:09CV203 (M.D.N.C. filed Mar. 2009), the magistrate judge recommended dismissal of United Guarantys fraud, negligence, negligent misrepresentation and unfair business practices claims under Rule 12(b)(6).

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LOAN MODIFICATIONS, TRANSFERS & ASSIGNMENTS

Policyholders must understand and comply with their obligations when making any loan modifications or assignments, or changing servicers of the loans. This is especially important if a policyholder is considering a merger or required by the government to restructure subprime loans. Failure to fulfill such obligations could result in a reduced claim amount or even forfeiture of coverage. Here, we examine loan modifications, change of insured and change of servicer provisions.

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Loan Modifications Provisions

Require policyholders to obtain advance written approval from MIs before making any change in terms of loan
Hot issue with MIs given downturn in economy and push by government to restructure certain types of loans MIs may attempt to terminate coverage, especially if policy expressly provides such a remedy Even under Policies that do not require advance written approval, policyholders should obtain MIs approval in writing before making any modifications

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Change of Insured Provisions

Provisions that permit substitution of one insured for another as long as certain conditions are satisfied Important to consider if policyholder is considering a merger Advance written approval may be required if loan is sold, transferred, or assigned Therefore, as precaution, policyholders should obtain MIs approval in writing before selling, assigning or transferring a loan

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Change of Servicer Provisions

Require policyholders to provide notice and obtain MIs approval before changing servicers Important to consider if policyholder is merging or changing its corporate structure Failure to obtain written approval from MIs for change of servicers could result in a termination of coverage
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WHAT IS TITLE INSURANCE?

Insurance or indemnity contracts against risk of defects in title to property Major lenders take out title policies to cover: Mechanics liens & unrecorded liens Unrecorded easements & access rights Defects & other unrecorded documents Title insurance policies typically contain a duty to defend the insured in lawsuits that challenge title
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WHAT IS TITLE INSURANCE?

Title insurance is now commonly available internationally Policies are issues by title insurers (TIs) domiciled in U.S. and have choice-of-law and forum provisions that select U.S. Coverage provided in international policies varies greatly because of needs of customers and different real property laws
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EMERGING TITLE INSURANCE ISSUES

Deterioration in real estate market has also increased title insurance claims Scope and applicability of common exceptions from coverage under standard American Land Title Association

(ALTA) form
Violations of RESPA, unfair trade practices and unjust enrichment based on alleged overcharging for title insurance premiums

Significant amount of premiums should have been allocated to title searches and evaluations clearing title issues

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BUYBACK CLAIMS
Primarily breach of contract claims Breach of Contract Breach of (Express) Warranty Specific Performance Possible fraud based claims Misrepresentation (negligence) Misrepresentation (intentional)
Intent Reasonable reliance
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TRIGGERS
EPD (30, 60, 90, 2x w/in 180, etc.) Misrepresentation/omission of material fact (employment, income, etc.) Occupancy Absence of claims Broker malfeasance (license, relationship, fees, non-compliance, etc.) TIL/disclosure inaccuracies Underwriting / lending criteria Undisclosed liens Title policy exclusions Appraisals Document delivery Repurchase *
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Repurchase Litigation

Steps
File Analysis Records Demand Letter
Include remedies sought (buyback, indemnification, attorneys fees, etc.)

Complaint
Federal / State

Early ADR?
Split the pool Approach

Summary Judgment

Trial *
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Repurchase Litigation

Issues
Venue Ambiguity Bad faith Stale claim Mitigation Multi-party chains Calculation of damage Foreclosures / REOs Loans or pool

Switchouts
Holdbacks
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Repurchase Litigation

Cases
Resolution Trust (Home Owners Savings Bank) v. Key Financial (1st Cir. 2002) 280 F.3d 12 10 year litigation $8.5 million judgment No attorneys fees In re American Home Mortgage, U.S. Bankruptcy Court (Delaware) Case No. 07-11047 and related BK Code 555 and 559 safe harbors for repurchase agreements Schwab v. Residential Accredit Loans, et al., San Francisco Superior Court Case No. CGC-10-501610
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CONCLUSION
Given state of economy and its affect on MIs and TIs now

more than ever, MIs and TIs are looking to policy provisions and exclusions to deny coverage and companies are seeking to shift losses through buyback claims
Policyholders should review their Policies in order to understand and possibly resolve potential areas of dispute with their MIs or TIs Before engaging in a buyback dispute, companies should properly analyze the situation to make sure they

understand the true costs and risks involved a similar analysis should also be done before engagin in an aggressive defense of a buyback claim

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SCENARIO 1

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SCENARIO 2

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SCENARIO 3

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SCENARIO 4

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SCENARIO 5

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SCENARIO 6

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Thank you

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